A trust is essentially an agreement or promise. A person or company agrees to hold assets for the benefit of another. The one who holds the assets is called the trustee; those who benefit are call beneficiaries. There are many different types of trusts. The important thing to note is that different trusts are used for different purposes. The main features of the common type of trusts are as follows:
1. Discretionary Trust
This is the most common form of trust, often used in tax and asset protection planning, in which Trustees can freely distribute trust income and assets to beneficiaries named in the Deed. The trustee has full discretion to distribute both income and capital to whoever it decides and can vary it from year to year.
2. Standard Unit Trusts
A unit trust split up into units, much like a company is split up into shares. It is managed by a trustee who also holds the assets of the unit trust, while unit holders own a share of the trust in accordance with the number of units each holds. Profits and income are distributed depending on the number of these units held by each. The standard unit trust is often used for investment in properties, with each unit carrying the right to one vote. The unit holders have an entitlement, upon a 62% vote, to ask the trustee to terminate the trust at any time. The trustee may re-purchase units at any time and the units are saleable, but must first be offered to other unit holders before being sold on the open market. The unit holders have no direct ownership or interest in the trust property. The unit holders merely own their units and nothing else.
3. Fixed Unit Trust
This is similar to the standard unit trust. However, it gives unit holders a defined ownership of the trust property and capital of the trust when the trust is wound up. It also provides the unit holders the entitlement, upon a 62% vote, to ask the trustee to terminate the trust at any time. This trust has the same format as a standard unit trust except that the deed specifically provides that unit holders have an ownership in the trust property in direct proportion to the unit holding and no new units can be issued to unit holders unless they are issued in the same proportion as existing units.
4. Hybrid Trust
The word ‘hybrid’ means ‘made from a mixed origin’. Hence a hybrid trust is cross between a discretionary trust and a unit trust. This type of structure offers flexibility for business and investing as it includes the benefits of both types of trusts. The trustee is given a discretion to distribute income equally or unequally between any unit holders. This means that the trustee can have great flexibility in the distribution of income, but it also means that no unit holder can be guaranteed that an income distribution will be made to him, her, them or it in any given year.
5. Limited Discretion Unit Trust
This trust is identical to a standard unit trust, except that it gives the trustee power to distribute income to unit holders that are entitled to any company or trust in which a unit holder has an interest; or to any relation of a unit holder who is a lineal or lateral relative by blood, marriage, adoption or reason of a bona fide domestic relationship with a unit holder.
6. Charitable Trust
This trust provides that the beneficiaries can only be charities and that trustees must be appointed from the general community, rather than being controlled and appointed by an appointer. There are three different types of charitable trusts which operate in Australia:
1.Simple Charitable Trust – donations are not tax deductible but the trust should incur no tax liability.
2.Charitable Trust with Gift Deductible Status – there are strict requirements which these trusts must meet to be granted this status.
3.Developing Country Relief Fund – solely for the purpose of relief to a developing country, this trust has very strict requirements.
7. Child Maintenance Trust This type of trust is utilized after a family breakdown and pursuant to family court proceedings for the maintenance of children in the family.
8. Testamentary Trust
A testamentary trust is in the format of a standard discretionary trust but is created by a Will. First, a Will is prepared and executed by a person wanting to establish a testamentary trust. The Will incorporates a discretionary trust for the benefit of that person’s children. The Will has no effect and the trust has no effect until such time as the person dies; however, upon the person’s death the Will is administered and as a consequence the discretionary trust for the benefit of the children comes into existence and is then for all intents and purposes a standard discretionary trust.
9. Personal Injury Trust
This trust is for the benefit of a person who has received a payment as a consequence of a personal injury claim. It enables money to be paid into a trust and the income from that money to be paid out to a person under the age of eighteen.